Economics questions dealing with LM Model and GDP

ECO 583 Assignment 1

Answer all questions. Provide detailed economic reasoning. Show all calculations. Draw graphs whenever necessary. 1. An economy produces only three products: A, B and C. The prices and quantities for the years 2009, 2010 and 2011 are given below.

Prices Quantities

2009 2010 2011 2009 2010 2011

A $4 $6 $6 200 240 280

B $20 $22 $26 40 60 70

C $2 $4 $4 400 500 600

Using the above information answer the following questions. Show all calculations in an organized fashion. (a) Calculate nominal GDP for each year. (b) Calculate real GDP for each year using ‘09 as the base year. (c) Calculate the growth rate in real GDP between ‘09 and ’10 (d) Calculate real GDP for each year using '10 as the base year. (e) Using the new GDP figures calculate the growth rate in real GDP between ‘09 and ‘10 and '10 and ‘11. (f) Using ‘06 as the base year calculate chain weighted or chain linked real GDP for '09 and ‘10. Show and explain your calculations. (g) Calculate real GDP for each year using '11 as the base year. (h) Using the new GDP figures calculate the growth rate in real GDP between ‘10 and ‘11. (i) Using '09 as the base year calculate chain weighted or chain linked real GDP for '11. Show and explain your calculations. (j) Using your answers to 1 (a) and (f) above calculate the chain weighted or chain linked GDP deflators for ‘09 and ’10, when ’09 is the base year. Calculate the resulting inflation rate.

(40)

2. The following information is available for a closed economy with a lump sum tax structure:

(a) Government spending on goods and services, G = 1000, Tax, T = 1000 and Money Supply, M = 1200. Determine the equations for the IS and LM curves. Calculate the equilibrium values of GDP, Y, interest rate, i, consumption, C and Investment, I. (b) Determine the equations for the IS-LM curves if, G increases by 100. Calculate the equilibrium values of Y and i. (c) Suppose that following the increase G above, the Fed wants to maintain the same interest rate as in (i) above. Calculate how it should adjust money supply to achieve that goal. Calculate the resulting level of GDP. Show and explain your calculation.

(34) 3. Using the IS-LM model explain how the following changes in the economy can separately explain recession in an economy. (a) a drop in consumer confidence; (b) a drop in business confidence and a reduction in need for investment .

(12) 4. Analyze the impact of increased availability and use of credit cards on demand for money. Using a suitable graph explain how it affects the LM curve. Using the IS-LM model explain its impact on .

(12) 5. Suppose that Consumption depends on disposable income as well as personal wealth.

For simplicity wealth is given by real money balance

. Using the IS-LM model explain the effect of an

expansionary monetary policy on the IS and LM curves and on (12)